Hey guys
Firstly, I just wanted to say that I’ve been quiet on the macro report side of things as I’ve been extremely caught up with some things in 1) my personal life and 2) building out some new systems to improve my trading even more.
I will be switching back to the daily systematic reports as a lot of you guys reached out mentioning that you missed them!
There will be a more in depth piece next week.
Another side note, all trades laid out across the last 2 months are sitting in some heavy profits, I hope you have all capitalised. As i said previously, there will eventually be a live trade book here.
Now let’s get into it.
Warsh has pretty much used his first Jackson Hole to say that inflation is too high, stable prices are the Fed’s job, and hinted at hikes (which was already confimed by the forward curve). Without any surprise, he refused to give forward guidance or any explicit reaction function. Remember, he called forecast-based guidance something that works better in theory than practice.
ZT sold off through the speech and ended the day pricing rouhgly 61bp of hikes (we were at around 48bp prior to the meeting).
Given the inflation backdrop, where rates sit AND how strong growth is, I think the amount of hikes priced in are completely fair. Put it this way, we have rates at 3.75% with MORE than two hikes priced in, yet equities are sitting 1.3% off all-time highs. This means that growth in the system is more than strong enough to mitigate the so-called restrictive nature of the fed, but this gives us the EXACT focus… what exactly could shift growth to a point where we actually have less room for these higher rates, and more of a concern about how growth will survive such higher rates.
The channels I’m watching for this growth tail-risk are, 1) rising nominal long-end yields as macro OR fundamental data misses. Right now, the rising nominal long-end is mitigated by earnings beating across AI names (which is accounting for most of the S&P returns) and rising nominal GDP. 2) energy shock OR inflation staying too high. If we get some type of rally in oil again (doesn’t need to be as dramatic as before), and prices remain ABOVE $90, there becomes a strong chance that it feeds into core CPI and makes it extremely hard for the Fed to cut while eventually having negative impact on growth itself, which is the only thing holding up equities right now.
ES traded higher initially on Jackson Hole but then mean reverted and closed the day negative, I expect it to start trading towards 7,655 as I laid out in the substack chat.
ZT is also massively onsides with stops at breakeven. The double selling of both ES and ZT was laid out yesterday.
The key thing I’ll be watching into next week is how the 2s10s moves because right now it’s evidently telling us that the Fed is behind the curve, and equities are rallying on a liquidity impulse, but if we start seeing bear flattening as ES sells off, that’s confirmation that the market is repricing WHERE the Fed stands on inflation, and whether the forward curve will drift towards three hikes (unlikely still in my view).
Breakevens are also marginally up as credit spreads become a LITTLE less contained, but ultimately there has been NO catalyst so far to really blow out credit spreads. If there were to be, it’d likely be through equity or rates vol, which I also laid out in the substack chat yesterday. Keep an eye on skew and implied vol of the short-end, but more so how they are moving as a pair.
We’re beginning to see wider ranges in the gap between skew and implied vol, this is the exact type of thing where we could see vol blow out a little and transmit into equities. I am NOT aggressively short but as I said, I am targetting 7,655 in ES and holding ZT shorts until further notice (there is still so many inflationary pressures that make me want to hold rather than take the position off, when we start seeing some type of change in this thesis then I will be fast to take off my ZT shorts).
I was also short the USD from a couple weeks back, still floating onside and I will be adding to my short exposure ONLY when the marginal driver is differentials. Right now, correlations are weak and there are NO extremes in FX that make me want to put on additional risk.
Thanks
Alfie
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great piece